How Yahoo will cash in its $50b Alibaba stake without paying tax

Michael J. de la Merced

Marissa Mayer, chief executive of Yahoo, has announced that the internet company would spin off its 15 per cent stake in Alibaba, China's leading e-commerce company, into a separate company, avoiding any taxes on the transaction.

The decision, which Wall Street has been waiting for since Mayer joined the company in 2012, cheered shareholders since they will directly reap all the remaining profit from Yahoo's prescient investment, which cost virtually nothing a decade ago but is now worth about $US39.5 billion ($49.9 billion).

The deal is the simplest way of dealing with shareholder pressure to sell the shares in a tax-efficient manner.

Here is how it will work.

The company will put its 15.4 per cent stake in Alibaba into a separate company. Along with those shares will go what Yahoo is calling an "active trade or business," a small operating division that ensures the "spinco" is a real business as opposed to just a bundle of shares.

Yahoo will then give the shares in that spinco to its investors.

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Because the transaction involves only stock, the spinoff is considered tax-free to Yahoo. Shareholders in the new company would only pay taxes when they sell their holdings. And the move is much simpler than alternative transactions like a "cash-rich split-off," which some shareholders have publicly opposed.

"The transaction is designed to maximise value of Yahoo's Alibaba holdings exclusively to Yahoo's shareholders," the company wrote in a presentation to investors.

The structure resembles what Liberty Interactive, one of the media companies controlled by famously tax-averse billionaire John C. Malone, did with its 22 per cent stake in the publicly traded travel company TripAdvisor last year. Liberty created a new public company that contains both the TripAdvisor shares and BuySeasons, an online retailing subsidiary, and then spun that out to investors.

In a twist, however, the newborn Liberty TripAdvisor Holdings took out a $US400 million loan to pay its former parent company a dividend. Yahoo said on Tuesday that its own spinco will assume no debt, suggesting that it will not reap the same sort of cash bonanza from the move.

That move does raise an interesting prospect: Will Alibaba eventually buy control of that newly spun-off company? After all, the Liberty transaction was designed so that TripAdvisor could buy back the shares that Malone had owned.

The transaction is expected to close by the end of the year after the expiration of a lockup on the Alibaba shares tied to the Chinese company's initial public offering last year.

The immediate reaction to the announcement was positive, with investors driving Yahoo's stock up about 6 per cent in after-hours trading after disclosure of the plan.

Resolving the Alibaba question now turns the spotlight to Mayer's plans to turn around Yahoo's core internet advertising business, which has had years of declining revenue as advertisers and internet users switched their money and attention to flashier, more innovative services from competitors like Google, Facebook and Twitter.